Watch Oil

Outlook

Watch oil. Traders may be flaky and inconsistent, but their judgment on the geopolitical situation is interesting and probably useful. Reuters writes oil prices “jumped furtherearly on Wednesday after Trump's remarks on the MoU, with Brent crude trading at more than $78 per barrel. Traders may be on edge, but they'll likely assume the flare-up is simply a bump in the road, not a sustained restart of hostilities, and that the U.S. president’s statements are mostly​bravado.”

Today we get another day of NATO talks with Trump trying to blame the Iran war on allies declining to join his war and annoying everyone with talk of taking Greenland. We also get a 10-year auction and the Fed minutes. The minutes have a good chance of restoring the rate hike idea to a firmer position, since so many members are fretting about inflation. Warsh’s comments about AI promoting productivity are not really an antidote to hard data on inflation.

Forecast

When the Iran war merits a headline, it affects markets. When the Fed seems hawkish, it affects markets. Both are tailwinds for the dollar, whatever anti-dollar sentiment exists at the same time.

Anti-US sentiment is exemplified by Trump demanding the US get Greenland. Trump fed raw meat to the other members of NATO by persisting in his desire to get Greenland, perhaps by threatening to take the US out of NATO unless he gets it. As noted before, he cannot do that because NATO membership is a treaty approved by Congress, but of course Trump disregards any and all laws.

The early consensus on the effect of the war on asset prices is that it will be short-lived. Yields rose everywhere, stock markets slid nearly everywhere, and yet gold failed to rise, even though China reported recent new purchases, presumably as an auto-response to higher yields. 

The problem with the short-lived consensus is that the ball is in Iran’s court. One of its demands will no doubt be an end to Trump’s insults and demeaning remarks. Well, not going to happen. Being civil and polite would make him look wimpy, he thinks. That alone could drag things out longer than we now expect.

If so, the dollar gains can keep accumulating.